Are you thinking of purchasing a "SHORT SALE" property?
Before you do, there are some things you should know!!!
First of all, let me begin by telling you that I have been successfully been doing short sales since 1992, when the defense industry died in California. I jokingly say that I was doing short sales before the rest of the country even knew what they were... But that is not far from the truth! The most important thing you can do BEFORE ever thinking of getting involved in the purchase of one of these homes, is to have a Realtor who is VERY familiar with these transactions and have successfully completed numerous short sales! I find there are lots of agents out there that say they know about short sales, only to find out they do not have a clue once we get into the purchase. Going to a "short sale seminar" does not an expert make!
Okay, let me get off my soap-box!
Let's begin with the basics. There is absolutely nothing short about the time it takes to do a short sale!!! The name "short sale" is due to the lender(s) agreeing to take a short pay-off for the money owed. Actually, they take an extremely long time from beginning of the process, to the end. So if you have to be in a home within a specific period of time (less than a couple months), a short sale property may NOT be the right home for you.
What is a short sale? Let's assume that you owe $300,000 on a home. The current market value of the home if you were going to competitively sell it on the open market is $200,000. You do not have the $100K difference plus costs to be able to bring to the closing table to pay off the difference, so you opt to do a short sale. By doing so, the lender agrees to accept the $200,000 minus costs of sale as payment in full on your loan and let you off the hook for the $100K+ difference. In the process, you will ruin your credit for several years, but for some, it is their only option.
Short Sale Pricing: Short sales are generally priced far enough below the market value to get multiple offers from buyers, and low enough to provide an incentive to hang in the deal for the months and months it takes to complete the transaction. Generally, you can not go in and low ball this price and expect to get the home either because the price is usually already below market, and it still must be enough to satisfy the bank, making it profitable to accept your transaction rather than letting it go to foreclosure or auction.
Your Risks in Purchasing a Short Sale In most cases, short sale properties will not have documentation about the home, that a "normal" resale home would. These often include Disclosures (such as a SPDS) that are filled out by the seller giving the buyer of the history of the home while they had it. Disclosures contain a lot of valuable information, like if the seller has had any problems with the home in the past, if they are aware of any present problems and information about the utilities, etc.
Another document that is often not available is called a CLUE Report. This is a 5 year (or less on homes less than 5 years old) report from the sellers home insurance company that will let you know if there has been any claims made on the property. This can alert you to things such as flood damage, mold hazards, storm damage, etc. This will let you know if the home is insurable by YOUR home owners insurance company before you purchase the home.
Often, home warranties are NOT included on short sale properties. These are the one-year warranties available on homes at the time you purchase the home. In a normal sale, these are negotiated between a buyer and seller. In a short sale property, generally, if you want a home warranty, you will be the one who has to purchase it. I WOULD DEFINITELY RECOMMEND PURCHASING A HOME WARRANTY ON YOUR OWN IF YOU PURCHASE ONE OF THESE HOMES!!! Ask your Realtor about the home warranty companies, their costs and their coverages as they vary.
These homes are often in need of TLC (in varying degrees). Very few are pristine, most need a little cosmetic work such as paint or minor repairs, yet others have serious issues. You need to make sure an take an honest look at how much money is going to be needed to make the home in livable condition.
Another thing to consider... Pay very close attention when you are looking at a home that is a short sale, what UTILITIES are ON and which ones are OFF. YOU need to ask the question! "IF I MAKE AN OFFER ON THIS HOME THAT IS ACCEPTED, WHO IS RESPONSIBLE FOR TURNING ON THE UTILITIES PRIOR TO INSPECTIONS?" Often that responsibilty (and cost) will fall on YOU!!! If you think about it, the lender isn't putting out another dime since they are loosing money as it is. The seller often hasn't got the money to pay their utilities, let alone turn them back on. That leaves YOU. Generally, this is okay to most folks since you will be moving in within 30 days. There again, if this is acceptable, WAIT UNTIL YOUR DEAL IS ACCEPTED. Turn them on prior to the inspection. If the home is NOT acceptable to you and you will not be completing the deal within the time period specified, turn them off immediately and notify the utility company you will not be purchasing the home. Again, putting out the money to do this prior to inspections, may save you thousands in the long run! If you complete the deal, that is one less utility company to call and the cost for one month of service when the home is not lived in is usually minimal.
Also, these homes are almost always sold AS-IS. You NEED to be aware of what that means!
What exactly is AS-IS on Short Sale Homes? Almost always, short sale homes are sold As-Is. Mainly because there is no one who is in a position to pay for any repairs. The lenders do not know anything about the home and have never even seen the property. The seller is already upside down on their loan and most often behind in payments and unable to afford to do anything.
There is an inherent risk in purchasing one of these homes because as we already discussed, you do not know the history and now, you must agree to purchase the property AS-IS? This is true, but there are things you can do to help the situation. Again, you need a GOOD and EXPERIENCED Realtor!
Although you agree and must sign the As-Is form, you still maintain the right to do full inspections on the home. DO NOT CONDUCT ANY INSPECTIONS UNTIL YOUR OFFER IS ACCEPTED BY THE LENDER. (If you do and your offer is not accepted, you are not only out the cost of the inspections but the home you do not have a contract on.). Once you have received the word your offer is accepted and the terms are agreeable, then you have the right to conduct whatever inspections you desire within the time limit you specified in the purchase agreement. (In Arizona, this is often 10 days unless otherwise specified). THESE INSPECTIONS ARE TO BE DONE AT YOUR COST AND ARE NOT REFUNDABLE IF YOU WALK AWAY! At the end of the inspection period, you have 2 options: 1) Accept the property with all the faults found in the inspections and proceed with the purchase OR 2) Cancel out of the contract based on the items found during the inspection. Again, you need a competent Realtor to ensure you get the earnest money returned to you if the purchase is cancelled due to inspections. Home inspections run a few hundred dollars and are the best deal you can get when purchasing a short sale. Even if you walk away from the deal, better to loose a couple hundred dollars because of an item found on an inspection VS purchasing a home with thousands of dollars in unknown defects. -- You do NOT have the option to request repairs in an AS-IS deal, like you would be able to request in a "normal" transaction.
My Offer Has Been Accepted... Now What? Congratulations, the lender(s) have agreed to accept your offer on the home. Now, you have to get busy. Even though you have been waiting an eternity for the lender to accept your deal, almost always, you must now complete the transaction within 30 days. You need to get your loan documents completed as required and your Realtor will handle the rest, making sure that you can receive clear title at the end. Often there are (monetary) penalties, that the buyer is responsible for if the home does not close by the date in the lender approval letter. It is VERY important you, the Title Company, and your Realtor get the transaction CLOSED by that date!
Now that I have totally scared you, Short Sales do present you a good opportunity to purchase a home below market value, if you are not in a hurry and have patience.
If you would like addition information on homes available, call or email me!